An outlook for precious metals
Gold Gold penetrated the psychologically significant $1,000/oz barrier in mid-March. The macroeconomic environment remains broadly supportive of gold prices. Factors supporting gold include the credit crunch, heightened financial market instability...
Gold
Gold penetrated the psychologically significant $1,000/oz barrier in mid-March. The macroeconomic environment remains broadly supportive of gold prices. Factors supporting gold include the credit crunch, heightened financial market instability and an increase in inflationary pressures associated with rising oil and food prices. These factors, including prolonged dollar weakness, normally, encourage investor demand for safe-haven assets, notably gold. Accommodative US monetary policies are heightening inflationary pressures abroad according to many analysts, thereby supporting demand for gold.
On the demand side, high prices are eroding jewellery demand, particularly in the emerging world, where a majority of the world's jewellery is purchased. Mine supply is likely to remain static as producers try to secure output in the face of such obstacles as uncertain power supplies in South Africa. The bulk of official-sector gold activity is likely to occur within the Central Bank Gold Agreement.
The dollar has recently rallied after coming under pressure for the bulk of this year.
The prospect of a further recovery in the dollar (USD) remains an important component in the expectation for gold prices. Should the USD strengthen as most analysts expect, an important driver of the rally in gold would be removed. That said, other factors, including high commodity prices, inflation concerns, and a possible return to accommodative Fed policies, would offset the bearish impact of a stronger USD.
Silver
Analysts believe that the increase in silver prices to over $20/oz this year was caused in part by the gold rally, as well as by investor demand for commodities and other hard assets, stemming from USD weakness and financial-market uncertainty.
It is expected that the silver market will move into a small surplus this year from a small deficit in 2007. New mine output is expected to swell silver supply by nearly 40 million ounces this year. At the same time, jewellery demand is under pressure from higher prices and industrial demand is likely to be restrained by a slowing economy and higher prices. Government sales and hedging are unlikely to be significant this year and should have a limited effect on supply/demand. Scrap supplies have failed to react to high prices, in part because analogue photography is losing market share to digital photography. Equity-traded-fund (ETF) and investor demand remain buoyant, even in the face of price corrections.
Although the silver market will continue to track gold prices, it is expected that the metal's inherently weaker fundamentals will leave it theoretically more vulnerable than gold to a commodity-sector correction, especially if ETF demand weakens.
That said, ETF off-take should remain strong, based on investor appetite for hard assets.
Platinum
Platinum still has the best fundamentals of all the precious metals. Mine supply looks set to contract, probably below last year's levels. An uncertain power-supply outlook in South Africa is only one of the challenges facing producers, including labour and equipment shortages and declining ore grades in mature mines.
We estimate automotive demand for catalytic converters will lead platinum consumption to rise again, despite the ongoing impact of efforts to substitute with palladium. Declining demand for platinum from US automakers, caused by weak production, is more than offset by auto purchases outside the US.
Jewellery demand is expected to weaken as a result of high prices. We now estimate the platinum market will be in deficit by 547,000 ounces in 2008, compared with previous estimates of 488,000 ounces.
Palladium
The jump in prices in mid-March was based not so much on palladium's fundamentals but on rising platinum prices and investor demand for hard assets. Demand from automakers remains imp-ressive and is set to grow in 2008, as they increase production and substitute for platinum.
Nevertheless, it is expected that the palladium market will remain in surplus, undermined by Russian stock sales.
The price of palladium, in our view, has tracked the strength in platinum, albeit at a considerable lag. Despite our positive outlook on platinum, we do not expect palladium prices to rise by any great magnitude, given the metal's sluggish fundamentals.
• This report was compiled by the Marketing Department of HSBC Bank Malta plc on the basis of economic research and financial information produced by HSBC International Bank.
Gold penetrated the psychologically significant $1,000/oz barrier in mid-March. The macroeconomic environment remains broadly supportive of gold prices. Factors supporting gold include the credit crunch, heightened financial market instability and an increase in inflationary pressures associated with rising oil and food prices. These factors, including prolonged dollar weakness, normally, encourage investor demand for safe-haven assets, notably gold. Accommodative US monetary policies are heightening inflationary pressures abroad according to many analysts, thereby supporting demand for gold.
On the demand side, high prices are eroding jewellery demand, particularly in the emerging world, where a majority of the world's jewellery is purchased. Mine supply is likely to remain static as producers try to secure output in the face of such obstacles as uncertain power supplies in South Africa. The bulk of official-sector gold activity is likely to occur within the Central Bank Gold Agreement.
The dollar has recently rallied after coming under pressure for the bulk of this year.
The prospect of a further recovery in the dollar (USD) remains an important component in the expectation for gold prices. Should the USD strengthen as most analysts expect, an important driver of the rally in gold would be removed. That said, other factors, including high commodity prices, inflation concerns, and a possible return to accommodative Fed policies, would offset the bearish impact of a stronger USD.
Silver
Analysts believe that the increase in silver prices to over $20/oz this year was caused in part by the gold rally, as well as by investor demand for commodities and other hard assets, stemming from USD weakness and financial-market uncertainty.
It is expected that the silver market will move into a small surplus this year from a small deficit in 2007. New mine output is expected to swell silver supply by nearly 40 million ounces this year. At the same time, jewellery demand is under pressure from higher prices and industrial demand is likely to be restrained by a slowing economy and higher prices. Government sales and hedging are unlikely to be significant this year and should have a limited effect on supply/demand. Scrap supplies have failed to react to high prices, in part because analogue photography is losing market share to digital photography. Equity-traded-fund (ETF) and investor demand remain buoyant, even in the face of price corrections.
Although the silver market will continue to track gold prices, it is expected that the metal's inherently weaker fundamentals will leave it theoretically more vulnerable than gold to a commodity-sector correction, especially if ETF demand weakens.
That said, ETF off-take should remain strong, based on investor appetite for hard assets.
Platinum
Platinum still has the best fundamentals of all the precious metals. Mine supply looks set to contract, probably below last year's levels. An uncertain power-supply outlook in South Africa is only one of the challenges facing producers, including labour and equipment shortages and declining ore grades in mature mines.
We estimate automotive demand for catalytic converters will lead platinum consumption to rise again, despite the ongoing impact of efforts to substitute with palladium. Declining demand for platinum from US automakers, caused by weak production, is more than offset by auto purchases outside the US.
Jewellery demand is expected to weaken as a result of high prices. We now estimate the platinum market will be in deficit by 547,000 ounces in 2008, compared with previous estimates of 488,000 ounces.
Palladium
The jump in prices in mid-March was based not so much on palladium's fundamentals but on rising platinum prices and investor demand for hard assets. Demand from automakers remains imp-ressive and is set to grow in 2008, as they increase production and substitute for platinum.
Nevertheless, it is expected that the palladium market will remain in surplus, undermined by Russian stock sales.
The price of palladium, in our view, has tracked the strength in platinum, albeit at a considerable lag. Despite our positive outlook on platinum, we do not expect palladium prices to rise by any great magnitude, given the metal's sluggish fundamentals.
• This report was compiled by the Marketing Department of HSBC Bank Malta plc on the basis of economic research and financial information produced by HSBC International Bank.